BazermanMoore

We Like Certainty, Even Pseudocertainty 67
making individual decisions that each seem sensible but that, when viewed as a whole,
are obviously suboptimal. For example, sales departments are encouraged to think in
terms of the acquisition of corporate gains, while credit offices are encouraged to frame
decisions in terms of avoiding corporate losses. To arrive at a coherent strategy for making
judgments under uncertainty, individuals and organizations need to become more
aware of this bias and develop procedures for identifying and integrating risky decisions
across organizations.
By being risk averse some of the time and risk seeking at other times, we are likely
to adopt a decision portfolio that is just as inferior as selecting the preceding choices (a)
and (d). To override our intuitive tendency for our risk preferences to be highly affected
by the problem frame, Kahneman and Lovallo (1993; see also Rabin & Thaler,
2001) have argued that we would generally be better off following an expected-value
rule for most decisions. This can be seen in the famous story of Nobel Prize–winning
economist Paul Samuelson (1963), who offered a colleague a coin-toss gamble. If the
colleague won the toss, he would receive $200, but if he lost, he would lose $100.
Samuelson was offering his colleague a positive expected value with risk. The colleague,
being risk averse, refused the single bet, but said that he would be happy to toss
the coin 100 times! The colleague understood that the bet had a positive expected value
and that across lots of bets, the odds virtually guaranteed a profit. Yet with only one
trial, he had a 50 percent chance of regretting taking the bet.
Notably, Samuelson’s colleague doubtless faced many gambles in life, such as
whether to invest extra money from his paycheck in stocks, bonds, or money markets.
He would have faired better in the long run by maximizing his expected value on each
decision, as his preference for running the bet 100 times suggests. All of us encounter
such ‘‘small gambles’’ in life, and we should try to follow the same strategy. Risk aversion
is likely to tempt us to turn down each individual opportunity for gain. Yet the
aggregated risk of all of the positive expected-value gambles that we come across would
eventually become infinitesimal, and the potential profit quite large.
In the real world, deviations from risk neutrality should probably be reserved for
critically important decisions such as job acceptances, house buying, corporate acquisitions,
etc., after careful consideration of the problem from multiple frames. By contrast,
most of us tend to be risk averse toward some choices and risk seeking toward others,
leading to a suboptimal group of decisions. Unless the decision is very important, a simple
and effective strategy is to use expected value as the basis for decision making.
WE LIKE CERTAINTY, EVEN PSEUDOCERTAINTY
As you probably know, Russian Roulette is a rather unpleasant game in which a single
bullet is placed into one of six chambers of a revolver. The barrel is then spun, and the
game’s players take turns pointing the gun to their heads and pulling the trigger.
The very thought of playing this game makes most of us queasy, as well it should.
What if you were forced to play the game, but had the option, before putting the gun to
your head, of paying some amount of money to remove the bullet and reduce your
chance of impending death from about 17 percent (one-sixth) to zero? If you’re like
most people, you would be ready to pay a handsome sum to get rid of that bullet.